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PETITIONER: N.A. MALBARI AND BROS.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, BOMBAY

DATE OF JUDGMENT: 25/11/1963

BENCH: SARKAR, A.K. BENCH: SARKAR, A.K. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1964 AIR 1807            1964 SCR  (5) 560  CITATOR INFO :  E          1969 SC 835  (6)  RF         1992 SC1139  (10)

ACT: Income  Tax-Penalties-One earlier, the second on  disclosure of  full facts-Whether justifiable-Income-tax Act, 1922  (11 of 1922), s. 28.

HEADNOTE: The appellant, a firm of Surat, had a branch at Bangkok,  to which it exported cloth, and the branch also made  purchases locally  and sold them.  During the war the business of  the branch  had been in abeyance, but was re-started  after  the termination  of  the  hostilities. in  its  return  for  the assessment  year 1949-50 the appellant did not  include  any profit  of the branch, but stated that the books of  account of  branch  were not available, and  therefore  its  profits might now be assessed on an estimate basis subject to 561 action under s.34 or 35.The assessment was made on the basis of  profit at 5 % on the export to the branch  appearing  in the Surat books.  A similar estimate was made for year 1950- 51.   For the year 1951-52 also the business profits of  the branch  were  not shown but the Income-tax  officerissued  a notice  to the assessee to produce the relevant  accountsand books.   The-appellant excused itself by promising  that  in thefollowing year these accounts for the year 1950 would  be produced.  Thereupon the Income-tax Officer made an estimate of  the  sales of the branch and of the net profits at  5  % thereon,  amounting  to Rs. 37,500/-, and the  same  day  he issued a notice to show cause why a penalty for  concealment of  the particulars of the income of 1951-52 should  not  be levied.   Subsequently,  the Income-tax  Officer  imposed  a penalty  of  Rs. 20,000/- on it as its explanation  was  not acceptable.  In the meantime assessment proceedings for  the year  1952-53  had  commenced and the  appellant  adopted  a similar attitude.  The Income-tax Officer was insistent and, therefore, appellants had to produce the accounts and  books of  the  branch, from which it appeared that  for  the  year 1951-52  the appellant had made a profit of Rs.  1,25,520/-. The  Income-tax  Officer  issued a  further  notice  to  the

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appellant to show cause why penalty should not be levied for deliberately   concealing  income  for  the  year   1951-52. Pursuant  to  this  notice  the  Income-tax  Officer  passed another  order  imposing  a penalty of  Rs.  68,501/-.   The appellant’s  appeal to the Appellate Assistant  Commissioner against both the orders of penalty was rejected.  On appeal, the  Tribunal  cancelled  the first  order  of  penalty  but confirmed  the  second one.  This hereafter,  the  appellant obtained  a  reference to the High Court  on  the  question: "Whether the levy of Rs. 68,501/- as penalty for concealment in  the original return for the assessment year  1951-52  is legal?"  The  High  Court  answered  the  question  in   the affirmative.  On  the appeal by special leave it  was  urged that the second order for penalty was illegal because  there was one concealment and in respect of that a penalty of  Rs. 20,000/-  had  earlier  been  imposed,  that  there  was  no jurisdiction  to make the second order of penalty while  the first order stood and for that reason the second order  must be  treated as a nullity; and that the fact that  the  first order  was subsequently cancelled by the Tribunal would  not set  the  second  order  on its feet for  it  was  from  the beginning a nullity as having been made when the first order stood. Held:     (i) The contentions must be rejected.  The Income- tax  Officer had full jurisdiction to make the second  order and  he  would  not lose that jurisdiction  because  he  had omitted  to recall the earlier order, though it may be  that the two orders in respect of the same concealment could  not be  enforced  simultaneously or stand  together.   When  the Income-tax  Officer ascertained the true facts and  realised that  a much higher penalty could have been imposed, he  was entitled to recall the earlier order and pass another  order imposing  the higher penalty.  If he had omitted  to  recall the  earlier  order  that would not make  the  second  order invalid, 1 SCI/64-36 562 (ii)In  the  present  case the  earlier  order  having  been cancelled  and no objection to the cancellation having  been taken, there is only one order, which is a legal order. C.V.  Govindarajulu  Iyer  v.  Commissioner  of  Income-tax, Madras, 16 I.T.R. 391, distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 78 of 1962. Appeal  from the judgment and order dated April 13,1960,  of the Bombay High Court in Income-tax Reference No 40 of 1959. R.J. Kolah, J.B.    Dadachanji,    O.C. Mathur and  Ravinder Narain, for the appellants. N.D. Karkhanis and R.N. Sachthey, for the respondent. November 25, 1963.  The Judgment of the Court was  delivered by SARKAR  J.-This is an appeal against a judgment of the  High Court  at  Bombay  given on a case stated to  it  under  the Income-tax   Act  and  answering  in  the  affirmative   the following question:               "Whether  the levy of Rs. 68,501/- as  penalty               for concealment in the original return for the               assessment year 1951-52 is legal?" The  question arose, in the assessment of the  appellant,  a firm,  for  the  year  1951-52  in  respect  of  which   the accounting  year was the calendar year 1950.   The  assessee carried  on business at Surat it had a branch at Bangkok  to

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which  it exported cloth from India.  The branch  also  made purchases locally and sold them.  During the last world  war the business at Bangkok had been in abeyance but it was  re- started after the termination of the hostilities. In  its return for the assessment year 1949-50 the  assessee did not include any profit of the Bangkok branch but  stated that  the  books of account of the Bangkok branch  were  not available  and  that  therefore  its  profit  might  now  be assessed on an estimate basis subject to action under S.  34 or  35  on  production  of  statement  of  account.  :   The assessment was there- 563 upon  made  on the basis of profit at 5 % on the  export  to Bangkok branch appearing in the Surat books. For  the  year 1950-51 again there was no reference  to  the Bangkok branch in the return and a similar estimate was made for this year also.  For the year, 1951-52 also the  Bangkok business profits were not shown but on January 11, 1952, the Income-tax Officer issued a notice to the assessee under  s. 22(4) of the Act to produce the profits and loss account and balance-sheet with the relevant books.  The assessee excused itself  by alleging on January 29, 1952 that the books  were at Bangkok and the profit and loss account and the  balance- sheet could not be drawn up unless its partner, Hatimbhai A. Malbary, went there personally and there was no certainty as to  when  he  would  go there  and  promising  that  in  the following  year  these accounts for the calendar  year  1950 would be produced.  Thereupon the Income-tax Officer made an estimate of the sales of the Bangkok branch at Rs.  7,50,000 and  of the net profits at 5% thereon, amounting to Rs.  37, 5001-.   This assessment was made on January 31,  1952.   On the  same day he issued a notice under s. 28(3) of  the  Act requiring  the  assessee to show cause why a  penalty  under s.28(1)(c) for concealment of the particulars of the  income of  1950  should not be levied.  The assessee was  heard  on this notice and on January 22, 1954, the Income-tax  Officer imposed a penalty of Rs.20,000 on it as its explanation  was not acceptable. In the meantime assessment proceedings for the year  1952-53 had  commenced  and this year also the  assessee  adopted  a similar  attitude as in the previous years.  The  Income-tax Officer was however insistent and, therefore, after  various adjournments, the assessee had on August 17, 1953 to produce the  accounts and books of the Bangkok branch.  It  appeared from these books that in the calendar year 1950 the assessee had made a profit of Rs. 1,25,520/-.  The Income-tax Officer thereupon  commenced  proceedings  under s. 34  of  the  Act against the assessee in respect of the assessment year 1951- 52 and gave 564 notice  to  the assessee to submit a return.   The  assessee then  submitted  a  return  stating  therein  correctly  the profits for the calendar year 1950.  The Income-tax  Officer completed  that assessment after directing the .issue  of  a further notice under s. 28(3) on April 8, 1954 requiring the assessee to show cause why penalty should not be levied  for deliberately  concealing  the particulars of his  income  of 1950.  Pursuant to this notice the Income-tax Officer passed another order on February 28, 1957 imposing a penalty of Rs. 68,501.  So there were two orders of penalty. The   assessee   appealed   to   the   Appellate   Assistant Commissioner  against both the aforesaid orders  of  penalty but  the appeals were rejected.  There is no dispute  as  to the assessment of the income.  The assessee then appealed to the  Income-tax Appellate Tribunal.  The Tribunal  observed,

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"It  is  indeed difficult to understand the action’  of  the Department in splitting up one offence into two proceedings. So  far as the levy on the basis of the 23(3) assessment  is concerned,  it appears to have no basis as till  that  stage the  Department  had  not  succeeded  in  establishing   and bringing  home  any guilt.  It was still in  the  region  of estimate........  The levy of Rs. 20,000 has to be  remitted in  full.   The levy of Rs. 68,501  is  entirely  different. With the definite knowledge that the Income-tax Officer  had obtained  that the profit for the year was Rs.  1,25,520  he has  clearly  proved the guilt of  concealment  against  the assessee............ The penalty is not at all excessive and accordingly   confirmed."  The  revenue  authorities   never questioned the cancellation of the first order of penalty. Thereafter  the  asseseee obtained a reference to  the  High Court of the question which we have set out at the beginning of  this  judgement.   That question, it  will  be  noticed, referred  only  to  the penalty of  Rs.  68,501  /-  imposed pursuant to the second notice under s. 28(3) for  concealing the  particulars  of  the  income of 1950.   It  has  to  be observed   that  in  the  return  that  was  filed  in   the proceedings started under 565 s.   34,  the assessee furnished correct particulars and  it also  produced  the  books.  So it  had  not  committed  any default in connection therewith.  The notice must  therefore be taken to have been in respect of the original concealment of the income.  The assessee knew-and this is what was found by  the  Tribunal% and that is a finding of  fact  which  is binding on a Court in a reference-that its profits were  Rs. 1,25,520/and it had not disclosed that profit originally nor produced  the  relevant books but  permitted  the  Incometax Officer  to  proceed on an estimate of that  profit  at  Rs. 37,500/-.   It  was  contended in the  High  Court  that  in respect  of  the  same  concealment  there  were  thus   two penalties involved, namely, one of Rs. 20,000 and the  other of Rs. 68,501/-.  The High Court agreed with the  contention of  the assessee that two penalties could not be  levied  in respect of identical facts but it held that the penalties in this  case  had  not  been levied on  the  same  facts.   It observed  that  the original assessment was  solely  on  the basis  of  an estimate and the second assessment  was  after knowledge of the full facts of the concealed income. In this Court Mr. Kolah has urged that the second order  for penalty was illegal because there was one concealment and in respect  of  that an order for penalty of Rs.  20,000/-  had earlier   been  made.   He  contended  that  there  was   no jurisdiction  to make the second order of penalty while  the first order stood and for that reason the second order  must be  treated as a nullity.  He further stated that  the  fact that  the  first  order was subsequently  cancelled  by  the Tribunal  would not set the second order on its feet for  it was  from the beginning a nullity as having been  made  when the first order stood. We  are unable to accept this argument.  It may be  that  in respect of the same concealment two orders of penalty  would not  stand  but it is not a question of  jurisdiction.   The penalty under the section has to be correlated to the amount of the tax which would have been evaded if the assessee  had got away with the concealment.  In this case having assessed 566 the  income by an estimate, the Income-tax Officer levied  a penalty  on  the  basis of that  estimate.   Later  when  he ascertained  the true facts and realised that a much  higher penalty  could have been imposed, he was entitled to  recall

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the  earlier  order  and pass  another  order  imposing  the higher  penalty.   If he had omitted to recall  the  earlier order that would not make the second order invalid.  He  had full jurisdiction to make the second order and he would  not lose that jurisdiction because he had omitted to recall  the earlier  order, though it may be that the two  orders  could not be enforced simultaneously or stand together.   However, in the present case the earlier order having been  cancelled and  no objection to the cancellation having been taken,  we have only one order and that for the reasons earlier  stated is, in our view, a legal order. It  was also said that when the first order of  penalty  was passed the Income-tax Officer was in possession of the  full facts  which  would  have justified the  imposition  of  the higher penalty.  It was pointed out that the first order  of penalty  was  passed  on January 22  1954  while  the  books disclosing  the  real  state of affairs  had  been  produced before  the Income-tax Officer on August 17, 1963.   It  was contended  that  in  inspite of this  he  passed  the  order imposing  a lower penalty, he had no right later  to  change that order In support of this contention reference was  made to C.     V.  Govinderajulu Iyer v. Commissioner  of  Income tax,  Madras"’.   There  it was  argued  that  the  original proceeding  under s. 23(3) and a proceeding under s.  34  in respect of the same period were different and in the  latter proceeding a penalty could not be imposed for a  concealment in  respect  of the original  proceeding.   Rajamannar  C.J. rejected  this  contention and held, "that so  long  as  the proceedings  under Section 34 relate to the  assessment  for the  same period as the original assessment, the  Income-tax Officer  will be competent to levy a penalty on  any  ground open to him under Section 28(1), even though it relates (1)  [16] I.T.R. 391 567 to the prior proceeding".  He however proceeded to  observe, "There  may be one possible qualification of his power,  and that  is when the default or the act which is the  basis  of the  imposition of the penalty was within the  knowledge  of the  officer  who  passed  the  final  order  in  the  prior proceeding  and if that, officer had failed to exercise  his power  under Section 28 during the course of the  proceeding before him.  Possibly in that case he would have no  power." Learned counsel for the appellant relied on this latter  ob- servation  in  support of his contention.  We do  not  think that  Rajamannar C.J. wished to state this qualification  on the power of the Income-tax Officer as a proposition of law. It was not certainly necessary for the purposes of the  case before him.  We do not wish to be understood as  subscribing to it as at present advised. But  assume that this statement of the law is  correct.   It has  no  application to the present case.  What is  said  is that if the default which entails the penalty was within the knowledge of the authority when it passed the final order in the prior proceeding no penalty could be later imposed.  Now Rajamannar  C.J.  was not dealing with a case in  which  two penalties had been imposed.  The case before him was one  in which no return had been filed pursuant to a general  notice but  subsequently  s.  34 proceedings had  been  stated  and resulted  in an assessment and an order imposing  a  penalty was  thereupon  passed.   The  final  order  in  the   prior proceedings  referred to by the learned Chief Justice  must, therefore,   be   final  assessment  order  in   the   prior proceedings.  Now in the present case the final order in the prior  assessment proceedings was made on January  31,  1952 and on that date the Income-tax Officer had no knowledge  of

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the  concealment  of income of Rs. 1,25,520.   Therefore  it seems to us that the observation of Rajamannar C.J. does not assist Mr. Kolah.  We may also observe that the first  order of  penalty  passed on January 22, 1954, was pursuant  to  a notice  issued on January 31, 1952 in respect of  which  the assessee had offered 568 his  explanation  on March 11, 1952.  That notice  ’was  not concerned  with any concealment that came to light from  the production  of the books on August 17, 1953 and,  therefore, on  this concealment the assessee had never been heard.   In assessing a penalty If on this notice subsequently  acquired knowledge would be irrelevant. The result is that the appeal fails and it is dismissed with costs. Appeal dismissed.